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spk00: Good morning, all. Welcome to today's conference call to discuss Green Lane Holdings' third quarter financial results. A press release detailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Green Lane website. As a reminder, today's conference is being recorded. On the call today are Aaron Locascio, Chief Executive Officer, and Bill Mote, Chief Financial Officer. Before we begin, GreenLane would like to remind listeners that today's prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to the questions received. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed in today's press release. This call also contains time-sensitive information that speaks only as of the date of this live broadcast, November 17, 2020. Factors that could cause Green Lane's results to differ materially are set forth in today's press release and in Green Lane's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today and GreenLane assumes no obligation to update these statements as a result of new information or future events. During today's call, GreenLane management may discuss non-GAAP financial measures, including adjusted net loss and adjusted EBITDA. GreenLane has included a reconciliation of these non-GAAP measures in today's press release, which is available in the Investor Relations section of our website at gnln.com. I would like to turn the conference over to Mr. Aaron Locascio, Chief Executive Officer of GreenLane. Please go ahead, Mr. Locascio.
spk02: Good morning, and thank you, everyone, for joining us today. During this call, I will review our business transformation plan, third quarter sales highlights, operating environment, and business development activities before turning the call over to our Chief Financial Officer, Bill Mote, for a detailed review of our financial results. During the third quarter, our new senior leadership team and I completed an extensive review of our business and acted on several key initiatives related to our go-forward category emphasis, organizational structure, and related staffing levels. We've taken additional decisive steps to de-emphasize certain product lines, invest in our fastest growing and highest margin opportunities, and further improve our cost structure. We remain focused on executing on our strategic vision, launching exciting new consumer products, and making the necessary positive changes throughout our organization to maintain Greenland's position as the leading platform for cannabis consumption products globally, return to profitability, and generate strong shareholder value. The steps we are taking now will reaffirm our strong foundation to capitalize on the anticipated sector growth as existing markets continue to evolve and new markets develop. Our approach is focused on four key pillars. The first focuses on increasing our higher margin revenue opportunities through our Green Lane branded products and broader assortment. The second is increasing our operational efficiencies by streamlining and optimizing our distribution platform to further reduce costs. The third is to refine our sales approach to drive customer growth. And the fourth is that we will continue to enhance and expand our platform through strategic development as well as a carefully selected M&A opportunities. Subsequent to the quarter end, we completed the transition to our new centralized and streamlined distribution model and also reduced worldwide headcount by 4.5%. In combination with other expense reductions, These decisions are expected to generate annualized savings of $5 million by the end of Q1 2020. We saw further proof that our transformation initiatives are being successfully implemented with continued diversification of our revenue mix, as well as growth in our high margin opportunities. Our core revenue grew 36% to $32.3 million in Q3 2020, compared to 23.8 million in Q3 2019. Notably, sales of our GreenLane brands grew 65% to approximately 5.6 million in Q3 2020, or 15.5% of total revenue. B2C increased to 13% for Q3 2020, compared to 3% in Q3 2019. and S&P increased 11 percent for Q3 2020 compared to 10 percent in Q3 2019. This focus on higher margin opportunities and appropriate channel mix will position us for long-term growth. On the product side, subsequent to quarter end, we obtained the exclusive right to expand the availability of Marley Naturals accessories to specialty locations in Central and South America, the Caribbean, and Europe. This is an important component of our global expansion strategy as Marley Naturals is one of our most popular brands, growing 210% compared to Q3 2019, and we are extremely pleased to bring these products to customers in new markets. We remain committed to pursuing opportunities for channel expansion and digital solutions as we continue to see a high number of customers utilizing online shopping to meet their retail demands. Online sales grew 196% for Q3 2020 compared to Q3 2019, and we anticipate that many customers that were driven online due to the ongoing pandemic will remain online shoppers when the pandemic ends. We continue to look for opportunities to improve our digital platform and create a global best-in-class customer experience. Turning to the numbers, revenue for the quarter was $35.8 million, a sequential increase of 10% compared with Q2 2020, while gross profit was approximately $2.5 million, or 6.9% of net sales. Bill will address this further in his discussion. However, I'd like to note that excluding the impact of certain inventory adjustments which were recorded in response to strategic management decisions During the quarter, gross profit would have otherwise been $7.3 million or 20.4% of net sales. As always, I want to finish by sincerely thanking our team for all their dedicated hard work as we continue to successfully execute on our strategic goals amid a challenging macro environment. We have made significant progress year to date on our transformational growth initiatives, and we look forward to ending the year solidly and entering 2021 on strong footing. With that, I'll now turn it over to Bill to run through our third quarter 2020 financial results in further detail.
spk06: Thanks, Aaron, and hello, everyone. As a reminder, the results I will be reviewing for you this morning can be found on our earnings release that is available on EDGAR and the investor relations section of our website at gnln.com. Before I begin my review of our third quarter financials, I want to provide some additional color on the improvements we have made and are making to the company. Since speaking with you last quarter, we have made substantial progress on our business transformation plan with a new COO, President, and CFO, We worked throughout August and September to craft the pathway that we anticipate will bring the business to profitability in 2021. We made strategic decisions to pivot away from certain lines of business to increase inventory velocity, margins, and turns. We also focused on swiftly selling down these de-emphasized lines to generate cash, allowing us to reinvest in more profitable third-party inventory and our own house brands. While these decisions had a negative financial impact on Q3 2020, these actions were necessary to put the company on the right course for future revenue growth and profitability. As part of our efforts to improve the financial profile of the company, we reduced worldwide staff by 4.5% in October and are implementing additional expense reductions between now and the end of Q1 2021 These reductions, along with the margin enhancing direction in inventory and sales focus, will save an annualized $5 million per year. This is in addition to the $1 million of savings that we discussed on our Q2 call. With all of these recent initiatives, we believe our path to return to adjusted EBITDA profitability in Q1 2021 is well underway. Net sales for Q3 2020 were 35.8 million compared to 44.9 million for the third quarter of 2019, a decrease of 9.1 million or 20.3 percent. This decrease was the result of the impact of our business transformation and strategic decisions made to reduce our low margin sales. We reduced our sales of nicotine products to 3.3 million, or 9.2% of net sales for the third quarter 2020, compared to 20.2 million, or 45% of net sales for the third quarter of 2019. This is an 83% reduction in nicotine-related product sales year over year. Looking specifically at our core business lines, Green Lane's core net sales grew 36% to $32.3 million compared to $23.7 million in Q3 2019. We are extremely excited to see this impact of our strategic vision. Revenues in the United States for Q3 were approximately $29 million compared to approximately $38.6 million in the same period in 2019, representing a decrease of $9.6 million or 24.9%. primarily due to a decrease in nicotine products. Revenues in Canada for the third quarter of 2020 were approximately 4.4 million compared to approximately 6.3 million in the same period in 2019, representing a decrease of 1.8 million or 29.3%. This was primarily due to COVID-19. Our European segment, which we entered last year with the acquisition of Conscious Wholesale in Q3 2019, generated revenues of approximately $2.3 million in Q3. On a sequential basis, Q3 net sales increased 10 percent from $32.4 million in Q2 2020. In Q3, gross profit was $2.5 million, or 6.9 percent of net sales, compared to $6.4 million, or 14.3 percent of net sales in Q3 2019. During the quarter, Green Lane made specific strategic decisions regarding existing inventory levels and go-forward product lines. As a result of those decisions, we decided to sell down certain inventory items, which resulted in adjustments to inventory of $3.2 million. By reducing our slow-selling inventory, we preserve warehouse space and working capital for higher-margin products, one of the key goals of our transformation initiatives. In addition, a $1.1 million reserve was made for obsolete inventory items, while we also recorded a $500,000 lower of cost or market adjustment related to a notification received from a supplier that they had taken a permanent reduction in their wholesale selling price of certain items. As Aaron mentioned, excluding the impact of these one-time inventory adjustments, Q3 2020 gross margin would otherwise have been 20.4%. This results in a gross margin improvement of 610 basis points compared to Q3 2019. Also, we incurred inefficiencies related to transitioning our warehouses that amounted to approximately 150 basis points of margin, suggesting further opportunity. I expect overall gross margin to expand from its current levels as we execute on our strategic vision with Green Lane brands at the core. Salaries, benefits, and payroll taxes in Q3 2020 decreased approximately $1.6 million to $5 million, or 23.8%, compared to Q3 2019, primarily due to a decrease in equity-based compensation expense of $2.5 million, as the company recognized a net reversal of stock comp expense of approximately $1 million during Q3 as compared to $1.5 million of stock comp expense in Q3 2019. G&A costs for the third quarter of 2020 increased approximately $5.9 million to $10.7 million compared to $4.8 million in Q3 of 2019, primarily due to a loss of $2.2 million related to a portion of an indemnification asset. This was a one-time expense. The remainder is due to an increase of approximately $900,000 in subcontractor fees, an increase of approximately $1 million in 30-party logistics expenses related to additional expenses incurred as we consolidated our distribution centers in U.S. and Canada, an increase of $800,000 in allowances for uncollectible vendor deposits incurred in connection with management's strategic initiative to improve inventory turnover, and an increase of approximately half a million in restructuring costs. Net loss for Q3 2020 was 13.8 million compared to 9 million in Q3 2019. Adjusted net loss was 6.9 million in Q3 2020 compared to 7.5 million adjusted net loss for Q3 2019. Adjusted EBITDA loss was 6.3 million in Q3 compared to adjusted EBITDA loss of 3.4 million in Q3 2019. The increase in adjusted EBITDA loss this quarter was primarily driven by an increase in G&A cost of 3.7 million in Q3 2020 as compared to Q3 2019, which increased overall net loss for the current period along with a provision for income tax expense of approximately $11 million recorded in Q3 2019 related to a full valuation allowance recorded against our deferred tax asset in the prior year. This amount represented a positive adjustment to derive adjusted EBITDA loss in Q3 2019. We remain well-funded with $40 million of cash as of September 30, 2020. compared to $47.8 million in cash as of December 31st, 2019. Year to date, our cash used in operating activities was $3.8 million as compared to $33.5 million last year. This is an 89% improvement in cash utilization. With a renewed focus on efficiently managing our cash balance, we have improved our financial stability and have the flexibility to leverage our balance sheet to execute on growth initiatives while also pursuing potential M&A opportunities. With that, I will turn the call back to the operator and open it up for Q&A.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to ask three questions in order to allow others to have a chance to ask questions. You may rejoin the queue afterwards. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vivian Azar from Cowan. Your line is now open.
spk01: Hi. Thank you. Good morning. Good morning, Vivian. Good morning. I just wanted to start with the inventory adjustment that you guys took in the quarter. You know, we talked about this last quarter. It seemed like last quarter was a one-time thing. item, and now we've got another inventory issue, which sounds like it's, you know, more related to our strategic review. So, hoping to get more clarity on what changed to intra-quarter, please. Thanks.
spk06: Actually, Vivian, this is Bill Moat. I'll take that question. Vivian, we, in the third quarter, obviously, we turned several new management members into the group. As a team, we spent a good 60 days reviewing the entire business strategy. We, as a new management team, had a bit of a different perspective on what inventory turns should be, what the quality of inventory should be, what the velocity of certain SKU items should be. And from there, we made decisions about what we wanted to do going forward. One of our key aspects of our strategy is to continue to conserve our cash, and we wanted to be able to move some of these inventory items a lot faster than they were actually moving on the balance sheet. So we did make a strategic decision, Vivian, to reduce the selling price of certain items so that we could get the velocity up and the cash back into the companies. Our inventory turns are less than 1.5% at this point in time, historically. And we believe, as a management team, that needs to be higher than three. So there's a lot of work to do there, but the first step is setting in motion a rapid inventory sale for items that are either de-emphasized or that we're no longer going forward with. So that was the crux of the decision process to reduce inventory further.
spk01: That's really helpful, Bill. Thank you for that color. And just my follow-up on your outlook to get back to EBITDA positive, adjusted EBITDA positive in the first quarter of 21, certainly it's nice to see a sequential improvement in your top line, and I understand the $5 million in run rate cost savings from headcount reductions and other efficiencies, but can you help dimensionalize what kind of revenue base you need to generate the appropriate operating leverage to actually get to that positive adjusted EBITDA target in 1Q21, please? Thanks.
spk06: I think it's going to be in the low 40s, Vivian. We're going to need to be on an annualized basis, need to be in the low 40s on a quarter basis to achieve that.
spk01: Understood. Thank you very much.
spk00: Thank you. Our next question comes from the line of Scott Fortune from Roth Capital Partners. Your line is now open.
spk03: Good morning, and thanks for the questions here. Can you provide a little bit of color on the DTC segment and kind of maybe normalizing that level from the third quarter after the COVID, you know, post-COVID here? You know, we saw a meaningful pickup during the shelter-in-place, and what is kind of you guys expect the ordering pattern or the growth on the DTC side here as we normalize opening up the economy here?
spk02: Yeah, great question, Scott. Nice to speak to you as well. So, obviously, a tremendous lift on a year-over-year basis, as we had described in previous quarters. We saw the early indications, obviously, in late Q1, but really saw a tremendous uplift in DTC in Q2. That remains relatively sustained. It has come down on a sequential basis a little bit as brick and mortar has largely reopened. But as we kind of mentioned, on a go-forward basis, we do believe that we will see sustained increased levels of DTC on a go-forward basis. It'll be very interesting to see what impacts COVID may have as we continue through Q4 and into Q1. I know, obviously, all of us are well aware of the increase in COVID cases, and we're even seeing some lockdowns in international countries and watching that very closely. But again, it's great to have an omni-distribution channel where we have these different revenue channels to drive sales from. So we'll watch it closely to see how COVID may impact that. Overall, we do expect an increased sustained level of direct-to-consumer go forward. As we mentioned before, we're in the low teens as a percentage of total revenue, and we do anticipate that trend to continue at a minimum.
spk03: Great. Thanks for that color. And then kind of follow up on, you know, kind of your strategic initiatives here as far as your own stores, higher standard brick and mortar kind of rollouts potentially in Europe. And then, you know, you're well positioned with $40 million in cash. Kind of how are you guys looking at potential expansion from, the store side and what's the M&A opportunity that you guys are looking at from a European side? It seems that's where you want the global growth to continue to grow.
spk02: Sure. So I'll start with the question about the brick-and-mortar stores. You know, in a COVID environment, I will tell you especially, we're being very, very cautious about around brick and mortar stores. Obviously, there's been tremendous negative impact to many stores, brick and mortar stores around the world during the pandemic. We have reopened, we did reopen our brick and mortar stores back in July for the most part. But as of right now, especially during the COVID environment, we do not have any near or midterm plans to expand our physical brick and mortar footprint. Again, we'll continue to analyze as we continue to go through the pandemic and life begins to normalize in the future, but we have no near or midterm plans to expand that footprint. On the M&A side of things, we continue to have a very robust pipeline of potential opportunities that I'll let Bill speak more to as well. But generally speaking, at the height of the pandemic, we went into capital preservation mode and we were very cautious as no one really knew what the true impacts of COVID would be. Now that we have a better sense of that, we have reinvigorated and reengaged a number of potential M&A opportunities and conversations.
spk06: Yeah, and that's primarily the reason we're conserving our cash to make sure that we have plenty of dry powder to execute on those acquisitions to help augment our organic revenue and margins.
spk03: Okay, thank you. I appreciate it. I'll jump back in the queue.
spk00: Thank you. Our next question comes from the line of Glenn Mattson from Landenburg, Salmon. Your line is now open.
spk05: Hi. Thanks for taking the question. So, I'm curious, a little more color on gross margin and, you know, you have a lot of factors that should be helping gross margin over time, the in-house brands, the direct-to-consumer, the supply and packaging, all growing segments, all higher margins. Can you give us a sense of You know, how we should think about for next year is like a mid-20s number feel like right for you? And then remind us if the in-house brand margins are still holding up from where they were a couple quarters ago or a year ago or so. And maybe you can give us some more color on kind of what's driving that growth. And is it a new product introduction? Do you have more new products coming out of the pipe or just some color on that would be great.
spk06: Yep, so gross margins adjusted are 20.4%, and I also mentioned on the call that we had about 150 basis points of what I'd call noise in the margin related to the inefficiencies we had as we transitioned multiple warehouses into one centralized U.S. warehouse and a Canadian warehouse. So you take those two things together, 20.4 plus another 150 basis points, you get very close to 22%. and our expectation is for that 20.4-plus level to exist in the near future. Obviously, as we continue to convert more of our revenue, which we said on the call 36% of the growth in Green Lane or core products, as we continue to convert to our Green Lane brands, we'll see that margin increase. So our guidance, while we don't give a lot of future guidance, we're definitely confirming or reaffirming that the 20-plus margin area is where we'll be in the short term, which we feel nice and confident about. Related to just Green Lane brand margins on a year-over-year or quarter-over-quarter basis, they continue to be strong. And some of the growth that you mentioned for next year is going to come from products that we've already released in terms of product lines, but also from new product development that is being created out there. We do see strong revenues in the Vibes area, and we feel that will continue into next year. And Vibes, as we've mentioned before, has a very strong margin profile.
spk02: Yeah, and to follow on with Bill's comments there, so we are seeing tremendous growth in our Greenland brands. This is the existing brands, so we're seeing continued growth in the products we have already launched. We do have a robust pipeline of additional products that we'll be launching in the near and midterm, but definitely a lot of the growth overall in Greenland brands that we're seeing thus far is It's just the growth of the brands themselves. And we've called out a couple examples, like Marley Natural, 210% quarter-over-quarter growth. Vibes, 202% quarter-over-quarter growth. Year-to-date, Vibes is up 628% as an example. So we're seeing tremendous growth numbers and trajectory in our existing Greenland brands. And we will supplement that growth with additional launch of new products that we're very excited about.
spk06: And I actually used green – I said Green Lane Brands was 36. It was actually 65% growth in Green Lane Brands compared to last year at the same time. So as you can see, it's a considerable amount of growth and continued trajectory.
spk05: Right. Kind of related, I guess, but the – You know, in the last couple of years, there's a lot of noise around the quarters because of all the jewel stuff and everything. But is there a seasonal effect in Q4? Do you see, like, a bump in product revenue or anything like that from the holiday season?
spk02: Historically, we do see a seasonally adjusted positive increase in overall revenues that's tied up. generally speaking to the cooler months of the year, in particular the holidays as well. But oftentimes we see that trend continue into Q1 of 2020. So we do anticipate a seasonal lift to revenues.
spk05: Great. And last one for me. Can you just give us more color on the outlook for packaging business, just kind of some of the dynamics of what's going on there? And that's it for me. Thanks.
spk02: Yeah, the packaging business, again, in conjunction with a lot of the leadership changes that we made at the senior leadership level, we made some changes to senior leadership on the packaging division. We do anticipate a steady growth trajectory for the packaging business. We decided, again, similar to what Bill had mentioned before in the In the supply and packaging, we did de-emphasize certain lines of business that were somewhat legacy at this point and re-emphasize and refocus on some of the hotter products that we have and new innovative products that we continue to launch. So all that in, I would consider it, say, steady growth into 2021 and beyond is really what we're focused on.
spk00: Thank you. Our next question comes from the line of Mike Grondahl from Northland Security. Your line is now open.
spk04: Yeah, thanks, and good morning, guys. In terms of the restructuring that you guys have been going through, is there anything still significant that you need to clean up or fix or working on that you want to highlight?
spk06: Well, we continue to work on our overall distribution and logistics. That big chunk of that was done in the U.S., and we have to look at that all over the world to make sure we're doing that efficiently. We continue to look for any mechanisms to reduce other expenses, including some of the work that we've already done on our global headcount, which we announced that we reduced 4.5 percent in October. Those are the areas that we've focused on historically and continue to focus on. In addition, in the margin area, as I said, some of the work that we've done to improve the overall logistics and warehousing has caused temporarily an increase in cost there, which ultimately will diminish as we get lined out with all of the new warehouses and we're operating at 100% efficiency. So those are kind of the areas we're always focused on the entire P&L and anything that we can do to make things more efficient or less expensive, we'll continue to do so.
spk02: But overall, we spent a tremendous amount of energy and effort as an executive team in Q3. Again, a lot of new senior leadership to the team. So a heightened amount of activity in Q3. We'll always look to ways to continue to improve our operational efficiency and increase our margin profile in sales. But yes, an unusually high amount of activity in Q3. that while we continue to make incremental improvement, we do not expect to see that type of activity going forward.
spk04: Got it. It sounds like you're over the hump there. So, hey, did you guys push hard in e-commerce? You saw a lot of growth there, or was that just sort of a natural effect of COVID and whatnot? How do we think about that going forward?
spk02: It's a combination of both. I mean, obviously our team, we have a dedicated team of e-commerce experts that's constantly pushing the envelope in terms of the customer experience and driving new customers and existing customers to our sites. But definitely COVID was a positive windfall in terms of consumer purchasing patterns and behaviors. So frankly, it's the combination of those two. As we said before, we do anticipate an increased sustained level of online purchasing behavior to continue even post-pandemic, which is why we're making additional strategic investments in our e-commerce and other digital assets going forward.
spk04: Got it. And then maybe just lastly, nicotine sales, it's Does that remain low single digit for a while, or do you see that going away? How should we think about modeling that into 2021?
spk02: Another great question. So I would say the best way to characterize that is that we do anticipate it to continue growing. in a single-digit fashion on a go-forward basis. We'll, again, continuously evaluate that, but in terms of potentially just eliminating that. But frankly, our job here, we really want to make sure that we are meeting our customers' needs. And as of today, nicotine products do represent an important component of our customer's product lines. So we do anticipate to continue to carry those products. But again, the historical de-emphasis on nicotine products, while it's driven our overall concentration down, we'll continue to maintain those product lines for the foreseeable future. But there's also been a lot of pricing pressures in the market that have driven the prices down, which is also contributing to a lower overall revenue number or a concentration number. So all those things considered we do anticipate it to remain in our product portfolio for the foreseeable future as an important part of a broader portfolio to our customers and meeting our customers needs but that it will maintain a lower percentage of revenue. The only caveat to that is there's potential opportunity for Just on the short term, maybe Q4, as we had mentioned, kind of reducing the selling prices of certain inventory items. Some of that does include nicotine products. So we are in the process of selling down some of those inventory items that we have so that we can increase our overall inventory turns on a go-forward basis. So low single-digit, mid-single-digit go-forward basis, but maybe a one-time uplift in Q4.
spk04: Got it. Thank you.
spk00: Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Aaron Locascio for closing remarks.
spk02: Yeah, I just want to say thank you again for everyone for joining Greenland's conference call today. The replay for this conference call will be available in approximately two hours on Greenland's website and the investor relations section. I hope everyone has a wonderful day. Thank you. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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